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For housing market, economic worries trump downgrades

August 8, 2011 | 5:25
pm

Concern over the future of the U.S. economy -- not ratings-firm downgrades of the U.S. or mortgage finance titans Fannie Mae and Freddie Mac -- remains the biggest threat to the nation’s housing market, experts said.

With investors dumping shares of U.S. stocks on Monday, yields on U.S. Treasuries continued to decline, as buyers poured into what is traditionally considered a financial safe haven. Because of that flight to Treasuries, mortgage rates, which are tied to Treasuries' yields, are likely to stay near their historic lows in the near term, Guy Cecala, publisher of Inside Mortgage Finance Publications, said Monday.

“The stock market continues to be in the toilet,” Cecala said. “Investors don’t really have the choice to abandon Fannie and Freddie debt or Treasuries, so actual rates are going down.”

On Friday, credit ratings firm Standard & Poor’s downgraded U.S. debt from AAA to AA+, a move that ignited the broad sell-off Monday. S&P also downgraded mortgage titans Fannie and Freddie, saying those companies -- which were placed under conservatorship by the U.S. government in 2008 -- have debt that is exposed to economic volatility and any further downgrade of long-term U.S. debt.

Under more normal markets conditions, those moves would probably lead to a spike in mortgage rates, said Cecala of Inside Mortgage Finance. Freddie Mac, in a filing with the Securities and Exchange Commission on Monday, warned that a downgrade of its credit rating could lead to an upending of the mortgage market.

“Such actions could lead to major disruptions in the mortgage market and to our business due to lower liquidity, higher borrowing costs, lower asset values and higher credit losses," the company said, in its quarterly filing.

Reporting a loss for the spring, the company requested $1.5 billion in additional aid from the government.

But Michael D. Larson, a housing and interest rate analyst with Weiss Research, said that the weak economy remained the overriding factor for the housing market's sluggishness. The plunge in stock markets and talk of a double-dip recession have added to continued concerns over the direction of the economy, which will serve as a drag on the housing market, he said.

“This is not a rate-driven issue,” he said. “We have low rates, but we don’t have confidence, we don’t have jobs.”

There is some evidence consumers are taking advantage of falling rates for fear they will eventually rise. The online mortgage referral company LendingTree said Monday that it experienced one of its biggest days ever in applications for home loans over the weekend -- with many of those being applications for refinancing.